Russia signed an estimated $400 billion deal with China to supply 38 billion cubic meters of natural gas annually for as long as 30 years in a move seen as a long-term strategic decision to re-orientate the country’s energy exports. As the European Union pushes forward with energy diversity and tensions high over Moscow’s aggressive policy towards Ukraine, it appears that Russian President Vladimir Putin found a constant buyer on the nation’s eastern border, capping off almost a decade of negotiations.
The deal also shows that Putin is taking seriously the possibility of tougher economic sanctions from the West.
In 2013, the EU purchased 161 billion cubic meters of gas from Russia, which was approximately 30 percent of its needs. Ukraine transported nearly a half of Europe’s needs, while this year the planned figure is only 70 billion cubic meters and it may be even less, given the current tensions.
Since Russia’s gas monopolist Gazprom requires Ukraine to pay $485 per 1,000 cubic meters, Kyiv has frantically been looking for ways to reduce its dependence on Russian supplies. Ukraine has already signed a memorandum with neighboring Slovakia tp sell to Ukraine up to eight billion cubic meters of gas annually.
Russia says it has reached a 30-year deal to sell natural gas to Russia for what analysts estimate is $350 per 1,000 cubic meters.
Of the 50 billion cubic meters consumed in 2013, 28 billion cubic meters came from Russia, 20 billion cubic meters were extracted domestically, and the remaining 2 percent were obtained from Europe.
Alexey Miller, Gazprom CEO, called the Chinese deal a “historic event.” However, he refused to disclose the price for the gas being sold to China, although a simple calculation yields an estimate of $350 per thousand cubic meters.
“The deal is most likely good for China and bad for Russia, which helps explains why Putin did not disclose the price for gas delivery. The number floating around the internet is $350, which is simply the value of the deal divided by the amount of contracted gas. Energy analysts in China say that the real price is $300-$320 per 1,000 cubic meters, using the reasoning that China would demand a discount in exchange for supplying the actual investment,” Andriy Chubyk, Nomos think tank analyst, told the Kyiv Post.
Also not disclosed were the import and export duties, which will affect the real price of gas. That is up for future negotiation.
Moreover, Russia strongly needed the deal now because China is about to complete its trunk gas line to Turkmenistan in less than a year. Turkmen gas costs $320-$350 per thousand cubic meters. Gas supply is scheduled to start in 2019. Meanwhile the construction of the $22 billion pipeline linking Siberian fields with China may be partly financed through advance gas payments, which is being discussed now, Miller said.
“The pipeline extension (in China) is not likely to be built by Gazprom, because the Chinese prefer to use their own companies and workers…even abroad, which is what they are doing in Central Asia,” said Chubyk.
Gas negotiations between Russia and China started a decade ago. In 2009, the two sides signed a memorandum for the supply of 68 billion cubic meters of Russian gas to China, though in 2013, the terms of the deal were changed to 38 billion cubic meters. The two nations had not been able to reach a compromise on the price of gas, but since Russia appears more anxious due to various political risks, they finally reached one.
Kyiv Post associate business editor Ivan Verstyuk and business journalist Evan Ostryzniuk can be reached at [email protected] and [email protected].
